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Facebook: Bullish Testimony, Stock Turning Point

I
wanted to review my thoughts following Mark Zuckerberg's testimony to
Congress. Many of these thoughts we brought up in
chat to subscribers but I wanted to get my thoughts out more
officially and to anybody not on chat.

Bullish
Testimony

I
came away bullish from the testimony to Congress. Mr.
Zuckerberg was very well prepared and responded very well to what
Congress hoped would nail him. They did not which makes them look
bad. There were also periods of lightheartedness on both sides
meaning the tone of the questioning was much more bullish than could
have been expected.

Many
of the members of Congress were begging Mr. Zuckerberg for support of
their own individual causes which tells me he's probably more in the
clear.

Turning
Point?

As
you know I also wanted to see how the stock 'acts' on bad news and I
have mentioned these big climax events could be turning
points. The stock was up into his speaking and went up more
after he spoke and the next day. I think that's a very good
sign.

The
negatives out there will continue to be negative news-flow through to
November elections. But hopefully the worst of the shock value of the
news is behind us and the stock can act on earnings and fundamentals
which I am still very bullish.

Slightly
Higher Expenses

The
positives are our earnings
numbers, if correct, are still blow out despite their plans to up
expenses 45-60% in 2018 that they stated in November and again in the
recent earnings report.

Mr.
Zuckerberg did say something to the effect that they will have more
than 20,000 people by year end dealing with security. Facebook said
on November's earnings
call,

"We
already have about 10,000 people working on safety and security, and
we're planning to double that to 20,000 in the next year to better
enforce our community standards and review ads."

That
tells me we are generally on track with the 45-60% expense growth
they talked about. "More than" is a tick up but I think
they are having trouble getting there as Q4 expenses were below their
expectations despite announcing it halfway in their Q4.

I
have total expenses building through the year Q1 +41%, Q2 +46%, Q3
+48%, Q4 +51%. Our model is in their expense growth range but mid-low
end. I think it's too hard to get there. Mr. Zuckerberg did have one
brief comment after talking about the 20,000 people that the ramp is
challenging which could have been referring to the entire initiative
or AI.

Nonetheless the expense ramp is huge but their high margin
business model multiplied by the revenue growth more than offsets
that. Their business model is too strong based on the math.

Low
Chance Of Hurtful Regulation

As
for regulation, I don't expect hurtful regulation. Hurtful regulation
will hurt the many businesses benefiting from Facebook ads. Plus with
President Trump being pro business and a beneficiary of Facebook ads
(thus these hearings today) I see hurtful regulation a very low
probability this year or as long as President Trump is in office.

That
said, the lead up into November's elections will continue to flow
negative news against Facebook. That's why this news climax
today seeing positive stock action is bullish despite the coming
expected further negative news flow to come.

Less
Impact On The Business Than Expected

Lastly
Mr. Zuckerberg said "there was not" any meaningful user
drop off based on recent news. Recently Mr. Zuckerberg said there was
no "meaningful impact" to advertisers despite COO Sheryl
Sandberg said there were a few advertisers "paused spending."

In
combination I think there's a smaller amount that could impact
revenues but probably not to the degree of bearishness or earnings
risk that investors fear.

Conclusion

With
the stock down into earnings I think that, like other stocks that we
like, can be bought closer to earnings. The markets are rocky. The
tech news flow is rocky. That makes it reasonable to lean closer to
earnings. But so far, the tech earnings are mostly strong. Facebook
is one of them. So ex newsflow and market volatility the underlying
earnings fundamentals, I think are still very strong for Facebook.

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investments have many risks and can lose principal in the short and
long term. This article is for information purposes only. Ratings are
based on hypothetical trade directions. By reading this you agree,
understand and accept that you take upon yourself all responsibility
for all of your investment decisions and to do your own work and hold
Elazar Advisors, LLC and their related parties harmless. Any trading
strategy can lose money and any investor should understand the risks.